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Trump’s China trade deal delay bombshell upends the risk equation

<b>Europe

It’s been another choppy day for markets in Europe after an initially positive start. Once again it’s been an intervention by President Trump that’s upset the applecart, when in an impromptu question and answer session with journalists he held open the prospect that there would be no US, China trade deal, until after the US elections next year.

This insouciance about the prospect of putting off any deal has completely upended market expectations that we were potentially millimetres away from a deal, and also flies in the face of the optimism that has seen markets rally strongly over the last few weeks.

It also raises the very real prospect that the tariffs that are due to kick in on December 15th will now not get waived, and will actually get implemented. With the US President also mulling swinging tariffs on French luxury goods, equity markets are starting to look increasingly vulnerable to further declines, especially if the 15th December tariffs do happen after all.

For quite some time now investors have been assuming, somewhat naively perhaps that the new 15th December tariffs might well get waived, or delayed. That line of thinking is now seriously coming into question.

Unsurprisingly markets haven’t reacted well to this new wrinkle, and if investors were caught off guard by yesterday’s belligerence, then this new revelation is unlikely to assuage them that the US is anywhere near to closing any sort of deal with China, or anyone else for that matter.

The FTSE100 has borne the brunt of today’s selling, down for the fourth day in succession, hindered by virtue of the fact that it is more heavily weighted to US dollar earners, as well as the economic cycle. The prospect of increased tariff tensions, a stronger pound and a weak commodity prices has also combined to send it to its lowest levels since mid-October.

The CAC40 has also come under pressure on the back of concerns about US tariffs on the French luxury goods sector with Hermes, LVMH and Kering also down sharply, after the US threatened to push back on any French plans to implement a digital tax on US technology companies. The DAX rather strangely has managed to set itself apart from all of this, outperforming all of its European peers.

Unsurprisingly with stocks down heavily, bond markets have seen inflows, pushing yields sharply lower.

It’s been a choppy day for Cineworld after the cinema chain reported that full year results would come in below expectations. From being as much as 6% higher in early trading the shares have sunk back into the red this afternoon as investors worry about there being able to deliver on their full year targets, against a backdrop of fairly high levels of debt, after the company paid £2.5bn for US cinema chain Regal Entertainments.

There is a concern that going to the cinema may not be as popular as it once was with the increasing popularity of streaming services meaning it’s much more convenient to stay at home and watch films on a big 4K LCD screen. Despite this with Frozen 2 going great guns at the box office and Star Wars: The Rise of Skywalker, set to dominate in the lead up to and beyond Christmas, Cineworld should be able to meet market expectations, if not slightly beat them. 

Plumbing and heating provider Ferguson’s latest Q1 trading update has once again shown that a strong performance from its US business was helping underperformance in its UK operation. It hasn’t however stopped the shares from their fourth successive daily decline, from the record highs we saw at the end of last week. Revenues were up 5.3% to $5.21bn with the US business providing $4.89bn of that. Trading profit was $451m less an $18m provision in respect of IFRS16.

The best performers today in the FTSE100 has been Fresnillo and Polymetal, both gold miners.  

US

US markets opened lower on the back of this morning’s comments from President Trump that a US, China trade deal may not happen before next year’s US election.

With China insisting that any phase one deal would need a roll back of tariffs, and President Trump indicating that he is quite happy to wait another year to conclude a deal, the prospect of further tariffs kicking on the 15th December has become a much more realistic possibility, something the market hasn’t until recently thought it would need to price in. 

Amongst the biggest fallers Caterpillar is lower, as well as tech stocks like Apple, Intel, NVidia and Advanced Micro Devices, as it became more likely that the prices of the following items could well go up, whether it be smartphones, tablet devices, headphones, computer monitors and speakers.      

FX

The pound is amongst the best performers today boosted by the sustainability of the Conservative poll lead, as well as some short covering, as it edges towards the top of its recent range near the 1.3000 handle. It’s still way too premature to read anything into any of the polls, especially since the US President is in the country, and while there is rising nervousness what he might do that lead in any unguarded comments, particularly in relation to the NHS.

The Swiss franc and Japanese yen have also outperformed in their capacity as haven plays.

Commodities

The more aggressive tone around trade has seen gold and silver prices push higher, with gold hitting a one week high as investors rotate funds out of stocks and into havens. To really push on gold prices need to break above the $1,480 an ounce level. US treasuries also gained with US 10 year yields falling back sharply from one week highs.

Crude oil prices also came under pressure, ahead of this week’s OPEC meeting as the negative narrative around the trade story causes prices to slip back, falling to one week lows in the process.

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